Gold Resource Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited results cover the Don David Gold Mine in Mexico; Fortitude Gold was spun off on December 31, 2020 and is reported as discontinued operations in the 2020 comparisons. Amounts below are U.S. dollars unless noted.
Financial and operating results
| Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 |
|---|---|---|---|---|
| Net sales | $30.8 million | $12.5 million | $58.1 million | $34.7 million |
| Mine gross profit (loss) | $6.9 million | ($1.3 million) | $15.5 million | ($1.2 million) |
| Net income (loss) | $1.3 million | ($1.8 million) | $3.8 million | ($4.9 million) |
| Diluted earnings (loss) per share | $0.02 | ($0.03) | $0.05 | ($0.07) |
Q2 mine gross margin was approximately 22%, versus a gross loss in the prior-year quarter. Sales growth reflected higher realized metal prices and greater production and sales compared with the 2020 COVID-related shutdown. Q2 gold and silver equivalent ounces sold were 9,685, up from 4,333; realized prices were $1,822 per gold ounce and $26.88 per silver ounce.
Q2 production costs were $19.5 million, up 84% year over year. The filing attributes the increase partly to higher production, Mexico labor reform obligations, higher processing chemical prices and diesel consumption. Q2 cash cost after co-product credits was $713 per gold-equivalent ounce and all-in sustaining cost (AISC) was $1,280 per ounce; these are non-GAAP measures. H1 AISC was $1,120 per ounce, down from $1,606.
At June 30, cash and equivalents were $30.5 million, up $5.1 million from year-end; working capital was $32.6 million. H1 operating cash flow was $16.1 million, capital expenditures were $9.3 million, and dividends paid were $1.7 million. The balance sheet reported $21.3 million of total liabilities and $93.3 million of equity; no borrowings are listed. Cash includes $28.7 million held in foreign subsidiaries.
Material changes and business developments
- Q2 2020 operations were curtailed by the Mexican COVID-19 shutdown, making year-over-year production comparisons unusually favorable to 2021. The company reported 129,590 tonnes milled in Q2 2021 versus 87,565 a year earlier.
- Mexico’s labor reform required employees to be brought onto the company’s Mexican subsidiary effective June 2021. The company recorded a $1.2 million statutory profit-sharing accrual and $0.7 million for severance benefits; management cited a total $1.9 million income impact.
- The company continued construction of its filtration plant and dry-stack tailings project, then expected to be completed in Q3 2021. Management said the project should permit reuse of about 80% of process water, support reclamation and extend existing tailings capacity.
- Management began a broad review of geology, metallurgy, block models, mine planning and mining methods. Changes to the mine sequence addressed ground-support challenges at Switchback; mining resumed in the Soledad vein.
- The company added Alberto Reyes as Chief Operating Officer. Shareholders approved increasing authorized common shares from 100 million to 200 million. No ATM shares were sold in H1 2021.
Outlook, risks and contingencies
- 2021 capital guidance was $22 million, with a separate exploration budget of $7.2 million ($29.2 million combined). Management said the originally guided $9.8 million for underground development was unlikely to be fully spent, pending mine-plan review.
- The gold regrind circuit was expected to be completed and commissioned by Q1 2022, with management estimating a 6%–10% increase in gold recovery. The dry-stack project was expected to require another $2.7 million to complete; the regrind project another $1.8 million.
- Exploration included underground and surface drilling at Aguila, Arista and Switchback, with additional drilling planned for satellite areas in H2 2021. Alta Gracia fieldwork was deferred and no drilling was planned there for 2021.
- The company reported two lost-time incidents in 2021 and said safety programs were being strengthened. Risks include mine geology and ground control, commodity prices, operating-cost inflation, Mexican peso movements, COVID-19 disruption and uncertain mineral-resource estimates.
- The company entered a zero-cost zinc collar covering 5,500 tonnes, approximately 43% of expected 2021 zinc production from June through December, with a $2,860-per-tonne floor and $2,992 ceiling. It had no gold or silver price hedges.
- A local community injunction seeking cancellation of certain concession titles remained unresolved; the company said it does not conduct the restricted activities on the named concessions. Management reported no other material pending legal proceedings and no basis to conclude ordinary-course contingencies would materially affect the company.
- Management said available liquidity should fund operations for the foreseeable future, while noting that COVID-19’s future effects and any prolonged economic disruption were uncertain. The company paid $1.0 million in Q2 dividends and discontinued its gold-and-silver-round dividend exchange program effective Q3.
Investor verification priorities
- Reconcile discrepancies between the audited-style financial statements and MD&A narrative: the statements report Q2 net income of $1.283 million and H1 net income of $3.810 million, while some MD&A passages cite different continuing-operations and total-income figures. Confirm the statements’ figures against the filed XBRL and earnings materials.
- Confirm delivery against the Q3 2021 dry-stack completion expectation and Q1 2022 regrind commissioning target, including remaining spend and expected recovery benefits.
- Track the mine-plan and ground-support review, Switchback performance, safety incidents and any resulting changes to production or development guidance.
- Assess how Mexico’s labor reform, metal prices, treatment charges and the zinc collar affect unit costs, margins and cash flow.
- Review the concession injunction’s status and the company’s evolving reserve and resource estimates following its model review.